2018-06-11

In-Depth: Where is the Greatest Risk of Bond Default in China?

Below is an in-depth look at China's bond market from Changjiang Securities. It highlights potential risks in private and public debt, broken down by industry, geography, private/SOE, second half maturities, and including data such as projected GDP growth and government revenue growth (through April).

Under the continuous fermentation of credit default events, the market has increased its focus on the characteristics of credit risk, and there has been a certain correlation between industrial bond defaults and regional economic and debt conditions. As credit risks continue to ferment, the market is increasingly concerned about the characteristics of credit risk regions. From a regional perspective, there is a negative correlation between defaults on industrial bonds and economic performance; at the same time, provinces and cities with higher local government debt ratios are relatively vulnerable to bond defaults.

From a regional perspective, the provinces and cities with the largest scale of breach of contract are more likely to be subject to large-scale defaults for single-industry or corporate bonds, and the attributes of companies subject to breach of contract are related to regional economic structure. Looking back historically, Beijing, Liaoning, and Shanghai, the top-ranking provinces and cities in breach of contract, have defaulted on construction, steel and trade, and similar industries. Breach of contract the subject’s corporate attributes are related to economic structure, and private enterprises in provincial and municipal private enterprises are more prominent. more defaults, Shanghai, Hebei and Sichuan country corporate bond coupons large-scale breach of contract, Jiangsu and Zhejiang private enterprises more defaults.

Focus on low-rated or private corporate bonds in Jiangsu, Hebei and other regions, especially in transportation, construction, real estate and commercial trade; also need to pay attention to Tianjin, Inner Mongolia and other regional credit risks. Under the contraction of credit, the re-financing of low-rated entities and private enterprises will be under pressure, and credit risks will continue to be exposed. Focus on the risk of default on industrial bonds in Jiangsu, Zhejiang, Hebei, and Fujian, especially in transportation, real estate, construction, and commercial trade. In addition, we must pay attention to regional risks in Jiangsu, Zhejiang, Tianjin, and Inner Mongolia.

This chart from the article shows Liaoning, Hubei and Beijing as 1,2 and 3 in defaults by value. Heilongjiang has the most default cases.

Private industry dominates the defaults.

Historical defaults are concentrated in Beijing, Liaoning, Shanghai, Shandong, Hebei, Inner Mongolia and Sichuan. Jiangsu, Zhejiang and Guangdong have seen a large number of defaults (red dots), but with smaller totals. The outlier on the right is Gansu.

From a regional perspective, there is a negative correlation between defaults on industrial bonds and economic performance; at the same time, provinces and cities with higher local government debt ratios are relatively vulnerable to bond defaults. We use the ratio of bond default scale to GDP to indicate the relative default of bonds, and use the average growth rate of actual GDP in the past four years to measure economic performance. We can see that there is a negative correlation between the relative default status of bonds in various provinces and cities and economic performance. In other words, regions with poor economic performance are relatively vulnerable to default on bonds, but overall this relationship is not particularly significant. In addition, the default of industrial bonds is also related to the debt situation of local governments. Provinces and cities with relatively high local government debt rates are relatively vulnerable to default.

No surprise in the relationship between default and GDP growth.

This second chart shows local debt levels versus defaults.

From a regional perspective, the provinces and cities with the largest scale of default are mostly cases where the single-industry or corporate bonds have large defaults. From an industry perspective, historically, bond defaults have been concentrated in the construction, steel and commerce industries. From a regional point of view, Beijing defaulted bonds are mainly concentrated in the construction and decoration industry and are all issued by Zhongcheng Construction Co. , Ltd.; the bond defaults in the steel industry are mainly contributed by Liaoning’s Northeast Special Steel, and the defaults in the transport industry’s bonds are mainly contributed by the Dandong Port of Liaoning; The major default of trade bonds is Shanghai Yunfeng Group. The industry is in a poor economy. The superposition of regional economy is not good, and related companies are more likely to expose credit risks. Dongbei Special Steel and Dandong Port have similar characteristics. The combination of industry and regional performance helps identify industries or companies with relatively high credit risks.

Here's the breakdown by industry:

This chart shows the same, but with geographic exposure added.

Combined with the regional economic structure, private enterprises in the provinces where the private economy is more prominent have more default violations; in the regions that are more dependent on the state-owned economy, there are more cases of default by state-owned enterprises. This year, the main body of breach of contract is mainly private enterprises. In addition to Liaoning, Hubei, and Sichuan, the default bonds of other provinces and municipalities are all issued by private enterprises. Historically, Shanghai, Hebei, Sichuan, and other provinces and municipalities defaulted on state-owned enterprises. Bonds defaulters in Guangxi, Shanxi, and Jilin were all state-owned enterprises. Defaults on bonds in provinces and cities such as Jiangsu and Zhejiang were mainly private enterprises. If you consider the properties of Zhongcheng City when it issues bonds, Beijing's default agents for bonds are basically state-owned enterprises. There are many state-owned enterprises in Beijing and Shanghai, and the scale is relatively large. In case of default, the scale of bonds involved is relatively large; besides, Beijing and Shanghai are rich in financial resources, corporate bonds have a weaker impact on regional credit, and the government defuses the momentum of state-owned enterprises’ breach of contract. Relatively insufficient.

In addition, there are many non-default private enterprises in this round of bonds, which are also related to the financing structure of China. The first meeting of the Central Financial and Economic Commission pointed out that financial risk prevention should take structural deleveraging as the basic idea, reduce the leverage of local governments and enterprises, especially state-owned enterprises, and we have seen that this round of breach of contract is dominated by private enterprises and there is Divorced. In addition to the deteriorating operating conditions of the company itself, the financing structure is different, so that the credit contraction has different effects on companies with different attributes. In the “Structural Deleveraging Essence”, we pointed out that China still focuses on indirect financing such as credit. State-owned enterprises are more likely to obtain credit, and it is more difficult for private enterprises to obtain credit. The credit contraction has further increased the difficulty for private enterprises to obtain credit. At the same time, non-standard financing has contracted. With the background of superimposed credit default, it has become more difficult for private enterprises to issue bonds, and the financing pressure for private enterprises has increased significantly.

This next chart shows the share of long-term lending held by central govt SOEs (yellow), local/provincial govt SOEs (red) and private enterprises (blue).

This chart shows the share of bonds issued below AA rating and the issuer. Private enterprises (red) and other (blue) are dwarfed by SOEs (yellow).

According to the maturity of bonds this year, the low-rated or private corporate bonds in Jiangsu, Zhejiang, Hebei, and other regions need to pay close attention, especially in transportation, construction, real estate, and commercial trade. Judging from the maturity of industrial bonds in June-December this year, industrial bonds in Jiangsu and Zhejiang are among the largest in terms of maturity, and the proportion of low ratings is not low; Beijing, Shandong, Guangdong, and Shanghai are among the largest in terms of maturity, but they have low ratings. The proportion is not high, and it is mainly based on state-owned enterprises. For example, Beijing’s industrial debt is at the top of its maturity scale, among which the largest is public utilities , and most of the bonds due to maturity are bonds issued by central SOEs, and there is a low probability of default. From an industry perspective, industries such as transportation, real estate, construction, and commerce and trade are among the largest in terms of maturity, and bonds in Jiangsu, Zhejiang, and Hebei regions are relatively mature.

The next couple of charts show upcoming maturities in the second half of 2018 by province. The first chart shows the percentage of bonds maturing below AA (red dot) and amount (blue). Beijing, Shandong, Guangdong, Shanghai and Shanxi lead in amount.

The next chart shows the amount of coming maturities broken down by private enterprise (blue), SOE (red) and other (yellow) by province. The gold dots show the share of private bonds. The just aforementioned provinces are all prominent here, but Zhejiang also sticks out with a large amount of private bonds maturing and a decent sized total amount.

The next chart shows the total amounts by industry along with percentage of private industry (red dot). Conglomerates and real estate (the third and fourth blue bars from left) stick out with sizable totals and larger private shares. The first bar is public services (utilities), followed by mining. The latter could be vulnerable if the global economy weakens or commodity prices tumble, otherwise the very low share of private business will probably mean few defaults.

The next chart is the same as above, but the amounts colored by the top 10 provinces.

In addition, the partial maturity of urban investment bonds may also cause some interference with industrial bonds, focusing on the related risks in Jiangsu, Zhejiang, Tianjin, and Inner Mongolia. Judging from the due date of the municipalities' investment in the provinces and cities in June-December this year, urban investment bonds in economically developed areas such as Jiangsu, Beijing, Zhejiang, and Guangdong are among the largest in terms of maturity, and the due dates for Hunan, Chongqing, Tianjin, and Sichuan are not. Low and low ratings accounted for relatively high; at the same time, the stocks of local and municipal investment bonds in Jiangsu, Zhejiang, Sichuan, Chongqing, and Tianjin were significantly higher than the official debt balance. From the perspective of economic and financial conditions, economic growth in Tianjin, Jilin, and Inner Mongolia is slow, and fiscal revenues and expenditures have slowed down and even declined. Considering the maturity of bonds and the economic and financial conditions, Jiangsu, Tianjin, Inner Mongolia and Jilin need to pay close attention. Sichuan and Hunan provinces and cities need to pay attention. City investment bonds may also increase the refinancing of industrial bonds in relevant regions and industries when they expire. pressure.

This chart shows local government bonds maturing in the second half (blue) and the percentage rated below AA (red dot). Jiangsu has the largest amount, followed by Beijing, Zhejiang, Guangdong and Hunan.

The next chart shows the level of debt from 2016 and 2017. Jiangsu again sticks out with heavy borrowing in 2017. Shandong, Zhejiang, Sichuan and Hunan also saw heavier borrowing last year (2, and 6-8 on the chart).

Here's the projected GDP growth rate for each province this year. Tianjin and Guilin are considered risks with slower growth.

(1) Historically, Beijing, Liaoning, and Shanghai have the largest total breach of contract, and Shandong, Hebei, Inner Mongolia, and Sichuan have relatively large defaults, and Jiangxi, Hunan, and other provinces have not yet defaulted on bonds.

(2) From the perspective of regional economy and debt, there is a negative correlation between industrial bond default and economic performance; at the same time, provinces and cities with higher local government debt are relatively vulnerable to bond default.

(3) The bond default and the regional economy also have a certain relationship. The private enterprises in the province where the private economy is more prominent have more breaches of contract; in the regions relying more on the state-owned economy, there are more cases of default by state-owned enterprises.

(4) Focus on low-rated or private corporate bonds in Jiangsu, Hebei, and other regions, especially in transportation, construction, and commercial trade; also note the regional credit risks in Tianjin and Inner Mongolia.